German Chancellor
Angela Merkel
has promised to welcome new French President Francois Hollande to Berlin “with open arms", while issuing a stern warning that Europe’s fiscal compact is not up for renegotiation.

Co-operation between Germany and France has been critical in dealing with Europe’s debt crisis but the relationship between Dr Merkel and Mr Hollande has so far been tense.

During the French presidential election campaign Mr Hollande promised not to ratify Europe’s fiscal compact, a reform pushed by Germany that obliges countries to bring down their deficits, unless it was amended to include measures to stimulate growth.

In response Dr Merkel urged French voters to re-elect
Nicolas Sarkozy
and snubbed Mr Hollande on a recent trip to Berlin.

Dr Merkel confirmed she had spoken to Mr Hollande and invited him to Berlin, adding she could work with the new French leader but making clear Germany’s position on the fiscal agreement would not change.

“We in Germany are of the opinion, and so am I personally, that the fiscal pact is not negotiable. It has been negotiated and has been signed by 25 countries. We cannot go back on ratified treaties after each election, otherwise Europe won’t move forward," she said.

“We are in the middle of a debate to which France, of course, under its new president will bring its own emphasis. But we are talking about two sides of the same coin – progress is only achievable via solid finances plus growth," she said.

The treaty, already ratified by Spain and Greece, is at the heart of a simmering debate about whether Europe’s plan to resolve the crisis is making the situation worse.

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It obliges many European countries to get their deficits down to 3 per cent of GDP by 2013.

German officials argue this is critical to providing stability; critics say the necessary spending cuts are simply causing economies to shrink to the point where the deficit targets are unachievable.

International Monetary Fund managing director
Christine Lagarde
said austerity measures would not unduly dampen growth if they were carefully calibrated.

“As next year looms, countries need to keep a steady hand on the wheel. If growth is worse than expected, they should stick to announced fiscal measures rather than announced fiscal targets.

“In other words, they should not fight any fall in tax revenues or rise in spending caused solely because the economy weakens," she said.

Mr Hollande will travel to Berlin as soon as he formally takes office on May 15. The French and German leaders are expected to thrash out a compromise plan for a European heads of state meeting on May 31. It is likely a “growth pact" will be added to the fiscal compact or drafted as a separate treaty.

Three proposals by Mr Hollande have received at least partial backing by German officials: increasing capital in the European Investment Bank so it can borrow more for infrastructure projects; reallocating unused EU funds, also for infrastructure; and a tax on financial transactions.

But a fourth, the creation of EU-wide bonds allowing countries to share their borrowing costs, has been flatly rejected.